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What are investment trusts?

Investment trusts are pooled investments, similar to a mutual fund portfolio, but with a smaller and more narrow focus of stocks or bonds. Typically, equity investment trusts hold 10 to 25 stocks in particular sectors such as financial services or technology, which is why they are considered a kind of specialty fund.

Investment trusts are professionally managed but differ from mutual funds in that investments are often fixed and held for a set period of time, which is usually five years. Because of the low portfolio turnover, management activity is reduced and, therefore, management expenses are usually lower compared to other funds they most closely resemble. Investment trusts are generally marketed for a limited period of one year, at which time the trust is closed to new purchases and a new pool of investments is set up with the same or similar holdings. In order to differentiate between the trusts, the year in which the trust was established is included in part of the name. When an investment trust matures after five years, for example, it sells its holdings and returns the money to unitholders in cash. An interesting feature of investment trusts compared to common mutual funds is their trading aspect. As with mutual funds, you can redeem your investment trust units at any time for their net asset value. Investment trusts also trade on stock exchanges so you have the added option of buying and selling them at a price other than their net asset value per share. Of course, if you trade on the exchange, you will incur brokerage commission fees. Investment trusts can earn dividends and interest, which result in annual taxes, but because the trusts rarely trade their holdings, capital gains are unlikely. The minimum initial investment is commonly around $5,000.